Posts Tagged ‘ Eurozone ’

Beware of the one-way, one-speed runaway train! Usually in the normal chain of events the train stops, lets the passengers off, turns around, and starts going the other way. In a rare circumstance, all hell breaks loose and the train can’t be turned around and runs off the track and over the cliff. In the investment world it is rare to find this type of “accelerating in your favor (or against you)” investment theme. Two recent moves highlight how risks can be largest in the most comfortable havens. In less than a month, the seemingly invincible Yen has sold off from 76 to 81 (the USD dollar now buys 5 more) which is a 6.6% move, and a very large one-month move for the currency market. Not to be...

The Spanish Empire reached the height of its powers in the 1500’s. Naval supremacy, decades of rapidly rising wealth, discovery of gold, and influence over the Catholic papacy led to Spain becoming a dominant world power. It wasn’t until Philip II and The Great Armada’s defeat against the English in the Anglo-Spanish War that Spain’s global power and sphere of influence crested. Fast forwarding 400 years, all of Europe and Spain are in a new crisis which is economic as opposed to military. As attention inevitably shifts from Greece to the next country at risk of contagion, the dynamics in Spain are likely to determine the EU-17’s future path. Spain has been through the wringer and if the country can emerge from recessionary dynamics, then all of Europe can....

The plan forward with the Eurozone crisis is the German plan forward. Germany proposed closer fiscal union and increased austerity for EU-17 nations with high deficits and/or high debt burdens. This path suits German interests well because there is little that needs to be changed. Unfortunately from Spain’s standpoint, the German path forward is not what Spain needs. This dynamic is highlighted with yesterday’s unemployment releases. Spain hit a 22.8% unemployment rate, which is an all-time high, while Germany released a 6.8% unemployment rate, which represents a new low since German reunification. It is clear that Spain needs dramatically lower interest rates relative to appropriate monetary policy set rates for Germany. It is also clear that Spain needs a drastically lower currency value relative to the currency value which...

Investing ahead of a recession is like a trip to the dentist for a filling when the Novocain isn’t quite right. You know you are in for some pain, but it’s unclear just how much, and how long it will last. Europe is accepting the German path forward, which will at a minimum, lead to plenty of pain for many countries. Spain, Portugal, Greece, Belgium, Italy, and France are all experiencing, or likely to experience, a recession. Forward looking indicators are declining, confidence is dashed, austerity being implemented, European financial assets down sharply, and interest rates higher. The ECB is taking a minimalist approach to fighting the recession and the 17 countries in the Eurozone have different agendas, interests, and policy aims. In the background of the economic recession, there...

The EU Summit and ECB meeting which transpired last week are likely to be the final supporting actions by Eurozone officials this year. The tack forward for Europe has been clarified; move ahead with the long and arduous process of fiscal unification, supported by a reactive ECB. The path ensures two outcomes; that there will be flare ups along the way which will negatively impact sovereign debt/currency markets, and that Europe’s economies will continue to slow as the mending process is drawn out. The way forward will be the German way forward, and the rest of Europe will need to accept it in the near term. Germany has the strongest and most robust economy in the Eurozone. German unemployment is low and the euro has already depreciated to levels...

The ECB issued a terse press release detailing an interest rate cut for the main refinancing operations of the Eurosystem (from 1.25% to 1.0%) commencing on December 14th. In addition, the ECB cut rates on the marginal lending facility and deposit facility by 25 basis points. This move was widely expected and had a limited impact on the euro or equity markets. The press conference and Q&A (45 minutes later) with financial reporters was where the real action took place. The only market friendly outcome was the announcement to extend lending to European banks from a one-year to a three-year term. The collateral requirements for these loans are also being loosened. The press conference was predominantly hawkish. When asked about hints earlier in the week that the ECB could...

Italian Prime Minister, Mario Monti, announced sweeping austerity measures and reforms, bolstering confidence in Italian sovereign debt markets. Monti’s plan includes tax increases, government spending cuts, pension savings and raising the retirement age. Italy needs to enact these reforms over the next couple of years, and there are some political risks to implementation, but the immediate market response is positive for this round of announcements as opposed to the cynical reactions in the summer and fall. Italian 10-year borrowing costs dropped from 6.68% to 6.10%. While it is dangerous to extrapolate any daily changes in sovereign debt yields due to the vagaries of European markets, this change is driven by a major announcement which would impact actual fundamentals (again if implemented) and the change in yields is simply a...

The financial crisis in Europe detracts from a normal focus on the underlying strength of the US and global economy. Despite the US economy being relatively solid, an escalating Eurozone crisis has the potential to derail economic growth because of the enormity of the impact from a financial seizure. While the solution to the Eurozone liquidity and structure crisis is being debated, there continues to be very resilient economic data from the rest of the world. US GDP data is set to recover towards the 2.5%-3.0% range based on the strength coming from retail sales, manufacturing, and the labor market. It is relatively rare for the market to have a flat year of returns when earnings grow sharply in a non-recessionary environment. Clearly, valuation multiples for the S&P 500 have...

Germany failed to get bids for 35% of the 10-year bonds auctioned today. Yields are up about 10 basis points this morning. The increase in borrowing cost is insignificant for Germany. Yields are still well below 2%, and Germany continues to benefit from the combination of very low borrowing costs, and a declining euro which helps support export competitiveness. The first sign of German bond market stress does highlight the risk the EU-17 is flirting with; the breakdown in confidence across the entire region. What started as a crisis in Greece has spread one-by-one to the rest of the European sovereigns. The reason the crisis has spread is not based upon profligate actions by the rest of the Eurozone. On the contrary, progress has already been made across Europe...

I’ve been writing about the impossibility of the ECB running appropriate monetary policy for 17 different nations. The dilemma couldn’t be more evident when contrasting the economy of Spain with the economy of Germany. Spain actually has less sovereign debt relative to GDP than does Germany. The problem for Spain isn’t the level of debt the country has incurred, but the depth of the current recession and the questionable capitalization of the Spanish banking system. Spanish inflation is running in a range of 1.7%-3.0% depending on how you define it (1.7% core inflation). This morning, bond auctions in Spain only attracted investors at much higher yields, approaching 7%. As a result of higher interest rates and a deepening recession (which is helping to reduce inflation), real interest rates in...

For a number of months, the financial crisis in Europe has been explained under the guise of sound versus unsound policy. If this were indeed the case, the fix would be simple; eliminate unsound and unsustainable policy and voila, the problems would just go away. European leaders have shifted blame continuously from one problem to the next. First the issue was speculators, then Greece, then Ireland, then Portugal, then Spain, then Belgium, then Italy, then the need for austerity, then the macro economy, and now the problem has erupted to everywhere. The current set of events will hopefully amount to a positive development as it becomes clear that the problem is the construct of the Eurozone itself. Europe’s misguided attempts to reform its way out of a crisis are...

After Wednesday’s market action around the world, it’s a good time for a big picture assessment on the state of the financial markets. The attitude out of Europe has pendulated between nonchalance and vitriolic attacks among the EU-17. Italian sovereign rates spiraling above 7% have brought the eleventh hour upon the region. Escalation of the crisis has caused all types of forward looking investment to become somewhat of a farce. The environment of complete and utter policy uncertainty will no longer be withstood by markets as the full scale part of the European financial crisis enters its fifth month. After bungling the first few opportunities to implement a fix, it has become clear that dramatic action will be required to keep the Eurozone intact. The problems of the Eurozone’s...